99-cent chain may not be able to buck inflation pressures

Ninety-nine cents just doesn't go as far as it used to, and that's a problem for the 99 Cents Only Stores chain.

Faced with fast-rising inflation and soaring food prices, the retailer -- known for never selling anything for more than 99 cents -- is reevaluating its pricing strategy. And that could mean breaking the $1 barrier for the first time in the company's 26-year history.

"There's no question we're going to need to do something," Chief Executive Eric Schiffer said to analysts this month after the company reported its second consecutive quarterly loss. "When you are part of a family that comes up with a concept, sometimes you're the last to admit that it needs to be changed."

Not surprisingly, many customers disagree.

"That's just crazy. Maybe they should start calling it the 99 Cents and Up store," said Kleshia Pittmon, 23, while buying groceries recently at a 99 Cents Only near USC. "I would not shop here anymore."

99 Cents Only, founded in 1982 by Chairman David Gold, pioneered the single-price retail concept. The City of Commerce-based chain opened its first store in Los Angeles and has since expanded to 277 locations, mostly in California but also in Nevada, Arizona and Texas.

The deep-discount retailer sells groceries, household supplies and health and beauty products, and remains one of the few true "dollar" stores.

At discount chain Dollar General of Goodlettsville, Tenn., for instance, current promotions include $8 backpacks and $2 for a box of Ziploc sandwich bags. Family Dollar Stores, a chain of more than 6,500 discount stores, is advertising Glad trash bags for $4.99 and Huggies diapers for $9.99.

In fact, keeping prices at a buck or less was never part of the overall pricing scheme at Family Dollar, said Josh Braverman, a spokesman for the Matthews, N.C.-based company.

"We try to keep our prices as low as possible," he said. But "it's hard to imagine getting anything for a dollar."

99 Cents Only is able to offer such low prices because of a business model that is "not based on having every single variety of every product out there," said President Jeff Gold, who is the chairman's son and the CEO's brother-in-law. The chain often buys closeout or overstock items from suppliers and changes its offerings to reflect market prices and availability, he said.

But lately, the company just can't get a wide- or attractive-enough selection of goods that it can turn around and sell for such a low price, Gold said. According to the Bureau of Labor Statistics' inflation calculator, 99 cents in 1982 has the same buying power as $2.26 in 2008.

Those challenges led Schiffer to tell analysts in a conference call this month that a price hike possibility was "definitely on the table." He said the chain was looking at experimenting with its prices but hadn't set a timeline for implementing any changes.

"Finally management has started to think outside the box," said Joan Storms, an analyst who follows the chain for Wedbush Morgan Securities in Los Angeles. "Some relief on the 99-cent price point will provide more stability for their business."

By capping prices at 99 cents plus tax, the chain has had to play around with the quantity and size of its goods, which can confuse customers, she said.

For example, when eggs became too expensive, 99 Cents Only temporarily began offering six-packs instead of a dozen to keep prices under a dollar. The company also reduced the size of its milk cartons and stopped selling items such as peanut butter and cooking oil on a regular basis.

"What's the point -- why not sell a standard size and price it accordingly?" Storms said.

Over the years, 99 Cents Only has made some changes to its pricing model.

At first, the chain sold every item for 99 cents or groups of items for a total of 99 cents. Last year it added "variable pricing," meaning products were sold at different prices -- which, of course, didn't exceed 99 cents.

But selling items for a dollar or more is another matter for the company, where the number 99 has become a source of pride. On its website, the chain boasts, "Still nothing over 99 cents, ever!" and says its stores are open until "9 p.m., nine days a week."

The company even does 99-cent-themed promotions, such as selling iPod Nanos for 99 cents to the first nine customers in line at the recent grand opening of its Redondo Beach store (the next 99 customers could purchase a scooter for 99 cents).

"The number 99 is a magic number -- deviating from that is something we absolutely are not taking lightly," said Jeff Gold, who began working for the company when he was 14. "I find significant discomfort emotionally about considering making the change."

He added that the company hadn't decided whether to change its name if prices were raised. But other discount chains have weathered price increases without adopting new names.

When Motel 6 opened in 1962, it cost $6 to rent a room for a night. Today, rooms start at $29.99, but the company has stuck with its easy-to-recognize name.